Foxconn: How to Beat the High Cost of Happy Workers

For Li Xiaozui, life as a factory worker assembling products for Apple (AAPL) and other technology brands has gotten better over the past year. Li, 20, is one of 500,000 people working in the southern Chinese city of Shenzhen for Foxconn, the Taiwanese contract manufacturer that stumbled into the media spotlight last year—and onto 's cover—following a series of worker suicides. Under pressure from Apple, Foxconn scrambled to improve morale and head off criticism about its labor conditions. It more than doubled wages in Shenzhen last year and instituted a program it calls "Care-Love." Li says she's not only making more money but has made new friends and gone on company-sponsored outings with colleagues. "I've been to the beach and the mountains," she says. "People are definitely much happier."

Employee turnover and suicides are down—yet so are profits and the stock price of Hon Hai Precision Industry, the flagship of the Foxconn group. On Apr. 27, Hon Hai announced that fourth-quarter earnings dropped 26 percent, to $742 million, over the same period a year earlier, even as revenue jumped 56 percent, to $33.1 billion. Its Taipei-listed shares have fallen 20 percent in the past year, too, making it one of the worst performers among Taiwan's 50 largest companies. Foxconn International, the Hong Kong-listed unit, in March reported a full-year net loss of $28 million on sales of $853 million.